Better Budgets: Making Tax Policy Work

Opening the event, Jill Rutter, chair of the event, explained that tax policy came up in the Institute's 2010 research on policy making as a significant area of weakness.

Paul Johnson opened by outlining the key ingredients of better tax policy:

Tax strategy. Governments rarely set out an overall tax strategy, although sometimes they explained their strategy on individual parts of the tax system. This contrasts with other policy areas. Having a more comprehensive strategy for the tax system would allow governments to avoid basic errors and U-turns.

Challenge and scrutiny. Parliamentary scrutiny is relatively weak in the area of tax. There is no select committee focused on tax although it raises 40% of GDP. The lack of challenge and oversight is also manifest inside the executive: while the Treasury adds significant value by challenging other departments, there is little challenge to the Treasury itself.

Public debate. Poor debate generates misinformation and that enables poor policy. For instance, the personal income tax rate has gone down over a long period of time while National Insurance contributions have been going up.

Responding to these opening remarks, Chris Wales identified four groups of actors in the tax policy landscape:

the Treasury and HMRC

others who interact with government, including organisations such as the Institute for Fiscal Studies or the Oxford Centre for Business Taxation, and academics

Parliament

the business community, the media, and civil society.

The Treasury had become better at engaging with business; Parliament was still hampered by lack of expert resources. He had other changes to propose: outsiders would benefit if more data were made available. The OBR should publish its forecast before budget day which would allow the Opposition time to respond. Tax policy would benefit if the OBR were separated from the Treasury and turned into a creature of Parliament. This would allow policy measures to be costed at the request of committees as in the US.

The best three countries for making tax policy were Finland, New Zealand, and Sweden. The Finns had mandatory post-implementation reviews, better consultation, better grounded debate on many topics, and more transparency on tax issues in the election campaign, where coalition agreements contained much more detail on tax measures.

William Morris challenged Paul Johnson's call for a coherent tax strategy: it would be difficult to put a lasting framework around money in place. But as the corporate tax road map had shown, a more coherent approach to parts of the tax system could bring improvement.

The process of making tax policy used to resemble a “fire-ready-aim” approach, where the policy conclusion was drawn first and the policy was articulated only later. This had changed as a result of the Treasury's 2010 “Tax policy making: a new approach” document. There was now less secrecy around tax policy than in the past; allowing comment on drafts helped improve the process. While the starting part had improved, the middle and end parts had not, mainly because “there aren't enough people in the Treasury policy function to make it work”. The O’Donnell review had been partly based on the US experience but not been translated across properly: there the Treasury policy function, although relatively small, recruited experienced professionals from the private sector, had dedicated staff, and drew on the expertise in the IRS.

The resourcing problem was compounded by the lack of a clear career structure for tax policy professionals in The Treasuryand HMRC – consequently many of the Treasury policy people only pass through the Treasury policy team. Finally, there has been a downgrading of the policy function in HMRC. As a result, HMRC approaches tax as a “policy maintenance problem”.

Turning to the end part of the policy process, Morris pointed out that while policy articulation was very good, the drafting was less than perfect in part due to constraint of the Finance Bill.

On the topic of parliamentary involvement, Morris agreed with Wales about the importance of providing more support to Parliament. In the US the relevant committees in both Houses have expert support, and there is also a non-partisan committee to help draft and score the budget.

Vanessa Houlder pointed out that the journalist's interests don't align with the interests of good tax policy: the budget is “a great set piece event” which focuses attention on tax, even though it is probably the cause of much of the complexity and policy mistakes.

She added that a lot of the complexity in tax legislation is driven by attempts to support entrepreneurship – even if research shows that prospective entrepreneurs do not respond to these kind of incentives. Scrutiny is also weak – although the OBR and an increase in consultation and more general interest in tax have improved the situation. It is also clear that the questioning in committees could be much better if MPs had more time to get into the subject and be able to draw on more support.

In the question and answer session, several topics were brought up:

Politics. Tax decisions were inherently political. There was no “fiscal neutrality now” lobby. Edward Troup, Permanent Secretary with responsibility for tax policy at HMRC, responded from the floor to note that, while there had been an excellent discussion of technocratic concerns, any debate on how best to make tax policy had to recognise the fundamentally political nature of tax-raising. The democratic legitimacy of government and the checks and balances around the process should be the over-riding concern in considering how best to design a policy-making process. Tax policy had to be owned by politicians not technocrats.

He recognised that, while he believed that there had been considerable improvements in the ‘Policy Partnership’ between HMT and HMRC over recent years, maintaining a high-quality calibre of policy professionals remained a significant challenge. He pointed to areas of real progress in widening the engagement in policy-making, noting data sharing with the academic community through HMRC’s Datalab to promote better private-sector research and, most recently and the establishment of the Tax Administration Research Centre. He encouraged continue debate and exchange.

On the substance of tax policy development, Edward noted the importance of understanding the effective incidence of tax – and that all tax is ultimately borne by individuals – and reminded the audience that after over 200 years Adam Smith’s principles of good taxation (in Chapter II of Book V of the Wealth of Nations) still stood the test of time and should be required reading for anyone interested in this, the most important of all public policy issues.

Tax simplification. The Office of Tax Simplification (OTS) is an innovation – and as tax simplification involves changing the law, it risks introducing further complexity. One of the important current questions is whether simplification should focus on the margins or take a “big bang”-style, wholesale approach to simplification – and also whether the remit of the OTS should be expanded to look at measures before they are introduced rather than simply at the existing stock.

Transparency. Panellists agreed that there has been significant improvement – initiatives such as the HMRC Datalab and the Tax Administration Research Centre have improved the opportunities for better understanding the tax system. But recent rankings such as the Budget Transparency Index showed that internationally progress has been made in some unlikely quarters and the UK could easily fall behind.

Policy capability. Tax policy could be improved by strengthening the tax policy function and creating a better career structure for tax specialists.

Quick wins: providing more support to Parliament; improving the career structure in the tax policy profession; and improving the process of drafting tax legislation.